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June 8, 2015

Want to tap into some of that home equity? Here are a few tips

By CAROL K. NELSON
Special to the Journal

It's been nearly a decade since the real estate market peaked and subsequently crashed, with 2011 marking rock bottom. Since then the price of housing has experienced rapid gains, and the market has stabilized.

In addition, the number of homeowners with negative equity in their homes is the lowest it has been since the start of the recession. In short, after years of turmoil, the housing market is healthy.

These conditions have led homeowners to either transition to new houses that better meet their current needs, or make improvements to their houses to better meet their current needs.

The driving force behind these trends: home equity.

Home equity is simply the value of a home, minus any mortgages or liens owed. For example, if a house is valued at $300,000 and the remaining balance on the mortgage is $150,000, the owner of that house has $150,000 in equity. For homeowners looking to sell a property, positive equity equals profit, which can be used as a down payment on a new house. For all other homeowners, equity equals borrowing power.

And locally, homeowners are taking advantage of home equity lines of credit. According to the Icon Advisory Group, applications for home equity lines and loans in Washington were up 32 percent this April, compared with April 2014.

Financing tool

Traditionally, home equity loans and lines of credit have been popular financing tools, but in recent years, they've taken a back seat to refinancing as people have looked to make their houses more affordable by taking advantage of historically low interest rates.

However, as the market recovers and people rediscover that the value of their home can be used to fund everything from home improvements to business ventures, John Roehm, KeyBank's head of consumer banking in Washington, has seen the use of home equity as a financing vehicle regaining momentum.

One of the most common uses of home equity financing is funding home improvements that benefit families not only by enhancing their lifestyles but also by increasing the value and selling price of the property. People also use home equity to build or buy a retirement home, purchase a new car or consolidate debt.

Also, many business owners use the equity in their home as collateral for loans, then use the proceeds for business purposes such as leasing work spaces, equipment and furniture, or buying supplies and services, such as marketing, that can help grow their business.

Two options

There are two primary types of home equity solutions. A home equity loan provides a one-time lump sum payment that the borrower repays in equal payments over a fixed period of time. A home equity line of credit (HELOC) provides cash as needed, at various points over a period of time. Payments will vary depending on the outstanding balance, and more funds become available as the loan is repaid, replenishing the line of credit.

A home equity loan is ideal for a large one-time expense, such as buying a car or consolidating bills. If you have ongoing financial needs, such as home improvements, business expenses, or life events, then the HELOC will likely be a better option for you.

When speaking with potential lenders, you'll want to ask the following questions:

• What is the annual percentage rate?

• Is the interest rate variable or fixed?

• What are the applicable fees (potentially including an application fee and a property appraisal fee)?

• What are the closing costs?

• Are there penalties for prepayment?

If you are a business owner and you are considering home equity financing for business purposes, the same questions and considerations apply.

How to get started

When it comes to borrowing against the equity in your house, the usual ability-to-repay qualifiers apply: assets, income, credit history and current financial obligations.

Talk to various lenders and learn about the lending programs they offer. Also, be prepared. You can streamline the process and get more accurate information if you do the following:

• Review your budget.

• Obtain your FICO score.

• Collect paperwork and documentation, such as W-2 forms and pay stubs. If you are self-employed, have your two most recent tax returns.

“As for all of the talk about the lending market tightening up since the recession, there is truth to that,” says Roehm. “But now that job growth has improved, home pricing has stabilized and lenders are easing their standards.”

Carol K. Nelson is Seattle market president for KeyBank.




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